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ESG by any other name…

By Sandeep Kumar, Managing Director & Head of the InvestTech Accelerator Program

Digital Strategy Transformation Roadmap 2019: Bank, Asset Management, Insurance Company Approaches

ESG is a short acronym, however its interpretation varies and sometimes go beyond just Environmental, Social & Governance factors. Several bodies have extended their definition to also include Human and Innovation factors. Most notable is SASB.org[1] whose guidelines and materiality are based on industry segments.

ESG analysis and reporting have become prominent and is likely to remain so for several years. Since many of these are not hard metrics, it makes it harder to have objectivity in data collection and reporting, especially when a firm needs to compare current versus the past, or do a cohort analysis.

The ESG ecosystem is vast -- from suppliers to corporates to banks, asset owners and asset management firms. The ESG world is characterized by complex data requirements, lack of standards and evolving reporting needs. We observe a variety of scoring methods utilized by ESG data provider firms. In addition to this, many large firms who have been active in Responsible Investing have devised their own set of metrics when they review their investment choices. Their clients may or may not use the same set of parameters when they undertake performance reviews. Lack of transparency in the way data is collected, categorized, ranked and reported makes it highly subjective and complicated.

Against this backdrop, we believe the ESG ecosystem has a trio of major needs:

  • Need for transparency, which is quite obvious, given the fact that ESG metrics are being given space alongside financial metrics when it comes to capital raising, investments and performance reporting.
  • Need to have independent validation of data as well as its sources, either via entities involved or via third-party validation services.
  • Need for standardization, across data elements, weightage and ratings scales, as per industry segments. There is the need to explore a standardized set of metrics and data flows, and several industry bodies and regulators are likely to address this need with vigorous new review.

We have been working in Sustainable Finance for a few years and are seeing it develop from various user angles – banks, asset managers and asset owners. Working in our proprietary FinLabs, we have developed custom toolkits to help manage these datasets and apply data science techniques to help rationalize it. Without a firm footing, any attempt to develop a predictive model around ESG scoring is not going to be successfully accepted. Therefore, we saw a need for having a commonly agreed to view when it comes to data exchange.

Toward this goal, we at Synechron have developed an initial version of ESGML --a variant of XML – that is aimed at providing a common set of data flows between participants, both for defining as well as the reporting side. This early version has been published quickly to seed review and further refinements. We plan to keep it open source which should encourage others to contribute to it. It will enable all to involve corporates, investment firms, asset owners and deal with industry bodies and regulators. Take a look at esgml.org

We will not stop just at developing a common data language for ESG. We are continuously adding to our toolkits to help in translation, mapping and reporting of ESG metrics.

Benefits to the Industry:

  • Corporates will spend less time figuring out how to report ESG results; rather they will invest time actually improving ESG factors.
  • Investment management firms will have a comparable set of metrics regardless the source of their ESG data.
  • Audit firms and regulators will be able to use standard data at the time of validation and verification.

[1]SSAB.org connects businesses and investors on the financial impacts of sustainability, across 170 countries, using various industry-specific standards, with $49+ Trillion in investor support.